On December 20, 2012, the Federal Energy Regulatory Commission approved numerous revisions proposed by the North American Electric Reliability Corporation to its Rules of Procedure (ROP). North Amer. Elec. Reliability Cor., 141 FERC ¶ 61,241. The approved revisions include numerous changes to §400, Compliance Enforcement, of the ROP, to Appendix 4B, Sanction Guidelines, and to Appendix 4C, Compliance Monitoring and Enforcement Program.
The numerous changes to the Sanction Guidelines, which describe the factors considered by NERC and the Regional Entities in determining monetary Penalties for Reliability Standards violations, should be of interest to all Registered Entities. Appendix 4B has been significantly shortened, simplified and made clearer. Some factors previously considered in determining Penalty amounts are now explicitly stated, and some new factors are identified. Clean and redlined versions of the revised Sanction Guidelines are available.
As required by Federal Power Act §215, the Sanction Guidelines specify that all Penalties must bear a reasonable relationship to the seriousness of the violation, while also reflecting consideration of other factors specified in the Sanction Guidelines (§2.3). As before, the starting point to determine a Penalty is the Base Penalty Amount range identified by applying the Violation Severity Level and Violation Risk Factor to the Base Penalty Amount table on the last page of the Sanction Guidelines. The Base Penalty Amount may be set at zero if this is the violator’s first violation and the actual or foreseen impact is inconsequential. However, this relief will not apply if the violator has a poor internal compliance program (ICP) or poor culture of compliance, the violation was intentional, or the violator attempted to conceal the violation or failure to comply with compliance directives from NERC or the Regional Entity (§3.2)
The adjustment factors listed in §3.3 are then considered and applied to determine the Adjusted Penalty Amount:
- Repetitive violations and the violator’s compliance history — may result in an increased Penalty. In addition to the violator’s previous violations, this analysis will consider previous violations by the violator’s affiliates, particularly violations of the same or similar Reliability Standard Requirements, and whether such prior violations reflect recurring conduct by affiliates that are operated by the same corporate entity or whose compliance activities are conducted by the same corporate entity. (§3.3.1)
- Failure to comply with compliance directives (i.e., with Remedial Action Directives or with agreed corrective or Mitigating Activities for prior violations) — may result in an increased Penalty. (§3.3.2)
- Disclosure of the violation through self-reporting or as the result of a compliance self-analysis by the violator following a Bulk Power System event; and voluntary Mitigating Activities — may result in a reduced Penalty. (§3.3.3)
- Degree and quality of the violator’s cooperation in the investigation of the violation and in any Mitigating Activities — could result in an increased or a decreased Penalty. (§3.3.4)
- Presence and quality of the violator’s ICP and other indicators of its culture of compliance — Penalty may be reduced if the violator has a strong ICP and/or culture of compliance, but will not be decreased if the violator has no ICP or a poor quality ICP. (§3.3.5)
- Settlement – The Penalty may be reduced if the violation is resolved through settlement, taking into account the speed with which it was reached. (§3.3.6)
- Any attempt to conceal the violation — The Penalty may be significantly increased (the presumption is that the Penalty will be doubled) if the violator attempted to conceal the violation or information needed to investigate it. The Penalty may also be increased if the violator resisted or impeded the discovery and review of the violation. (§3.3.7)
- Violation was intentional (unless it was a good faith effort to avoid immediate and significantly greater harm to the reliability of the BPS) – The Penalty will be increased (presumption that it will be doubled, or increased by even more if there were previous intentional violations). Violations that were an economic choice to violate the Reliability Standard are considered intentional violations and the Penalty will at a minimum be sufficient to disgorge the violator’s economic gains. (§2.9, 2.10, 3.3.8)
- Extenuating circumstances – unique extenuating circumstances, such as a natural disaster, may result in reduction or elimination of the Penalty. (§2.8, 3.3.9)
After determination of the Adjusted Penalty Amount, the Penalty may be reduced or eliminated based on consideration of the violator’s financial ability to pay. The Penalty may also be adjusted to ensure that it results in disgorgement of unjust profits or economic benefits gained through the violation. (§3.4)
Finally, the revised Sanction Guidelines specify that the Penalty determined through a settlement can supersede the Penalty that would otherwise by determined through application of the Sanction Guidelines. (§2.1)
Based on the revised Sanction Guidelines, these are important considerations for Registered Entities in positioning themselves to receive reduced Penalties for Reliability Standards violations that do occur:
- Have a strong, documented ICP in place and follow it, along with other indicators of a strong culture of compliance. Document that the ICP is followed and the other indicators of your culture of compliance.
- Promptly self-report violations when identified. If involved in a BPS event, conduct a self-analysis to identify both any violations that were committed and possible Mitigating Activities. Self-initiate Mitigating Activities for any violation.
- Cooperate fully with the Regional Entity and/or NERC in the investigation of the violation.
- Attempt to promptly arrive at a settlement of the violation.
- Affiliated entities should proactively share information, either directly or through the corporate parent, on each other’s violations, Mitigating Activities and lessons learned, to avoid repetitive violations within the overall organization.
- Intentional or “economic choice” violations, concealment of the violation or relevant information, and non-cooperation in the NERC or Regional Entity investigation, will result in substantially increased Penalties.